HSBC - USD: Heads I win, tails you lose

HSBC - "The dollar has risen materially on an index basis since the end of January and is higher against all other G10 currencies. While many would probably dismiss this move as reflecting no more than the effect of the negative stories that have afflicted the euro, the yen and sterling, there is a growing risk that its rally could be extended. A significant surprise in Friday’s payrolls, either positive or negative, could both see the dollar rise.US activity data have been generating positive surprises recently, and a standout positive payroll release could lead the market to reassess the potential timing of a change in Fed policy. This would likely have a strong positive USD impact. While strong US growth will take a long time to feed through to the rest of the world, liquidity reduction is immediate.Alternatively, a very weak number would see a lurch back to ‘risk off’ and probably also result in a higher dollar.Tactically we can see this type of market reaction, but any further short term rally in the USD is unlikely to be the beginning of a sustained move higher. In fact a knee-jerk sell-off, particularly of EM, should be bought.The Fed has set a high bar for changes in policy. It will take many months of strong payroll growth to get the unemployment rate down to the Fed’s 6.5% target. However, given the strong run of data it is worth asking how the market may respond to a genuine one-off surprise. For the USD it seems, for now, to be a case of: heads I win, tails you lose."